Economics Keypoints: The Theory Of Demand; Demand is the quantity of goods and services that consumers are willing and able to purchase at a given price and time. The determinants of demand are factors that affect the willingness and ability of consumers to buy a good or service. These determinants include:
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Determinants of Demand
- Price of the good or service: As the price of a good or service increases, the quantity demanded decreases, ceteris paribus.
- Income: The level of income of the consumers affects the demand for goods and services. As income increases, consumers tend to buy more goods and services, especially those that are considered normal goods. Conversely, as income decreases, consumers tend to buy fewer goods and services, especially those that are considered inferior goods.
- Price of related goods: The demand for a good or service is also affected by the prices of related goods, including substitute goods and complementary goods. When the price of a substitute good increases, the demand for the original good increases, while when the price of complementary good increases, the demand for the original good decreases.
- Taste and preferences: Consumer preferences and tastes also affect the demand for goods and services. Consumers tend to buy more of the goods that they like and less of the goods that they do not like.
Types of Demand
- Composite demand: A good or service that can be used for different purposes, and the demand for the good or service is affected by the various uses. For example, petroleum can be used for fuel, plastics, and chemicals.
- Derived demand: A good or service that is demanded because of the demand for another good or service. For example, the demand for steel is derived from the demand for automobiles and construction.
- Competitive demand: A good or service that competes with other goods or services for the same use. For example, the demand for Pepsi and Coca-Cola.
- Joint demand: Goods or services that are demanded together, such as cars and gasoline.
Types, Nature, and Determinants of Elasticity
The elasticity of demand is the degree of responsiveness of the quantity demanded of a good or service to a change in any of its determinants. The three main types of elasticity are:
- Price elasticity of demand: The degree of responsiveness of the quantity demanded of a good or service to a change in its price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price.
- Income elasticity of demand: The degree of responsiveness of the quantity demanded of a good or service to a change in income. It is calculated as the percentage change in quantity demanded divided by the percentage change in income.
- Cross elasticity of demand: The degree of responsiveness of the quantity demanded of a good or service to a change in the price of a related good. It is calculated as the percentage change in quantity demanded of the original good divided by the percentage change in the price of the related good.
The determinants of elasticity include the availability of substitutes, the proportion of income spent on the good, the necessity of the good, and the time period considered.
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Importance of Elasticity of Demand
The concept of elasticity of demand is important to consumers, producers, and the government. For consumers, it provides information on the responsiveness of the quantity demanded of a good or service to a change in price or income, enabling them to make informed decisions on how much to buy.
For producers, it provides information on the responsiveness of the quantity demanded to a change in price or income, enabling them to make informed decisions on how much to produce and at what price. For the government, it provides information on the responsiveness of the quantity demanded to a change in taxes or subsidies, enabling them to make informed decisions
- Helps consumers make informed decisions on how much to buy.
- Helps producers make informed decisions on how much to produce and at what price.
- Provides information on the responsiveness of the quantity demanded to a change in price or income.
- Provides information on the responsiveness of the quantity demanded to a change in taxes or subsidies, enabling the government to make informed decisions.
